Renewable energy upsetting power eco-systems

As highlighted at COP21 in Paris, the urgent focus for world governments is to limit the rise in the planet's temperature to 2°C by reducing greenhouse gas emissions.Debjoy Sengupta | ET Bureau | October 28, 2016, 21:51 IST

KOLKATA: Rapid increase in the share of renewables has destabilized the wholesale electricity markets in Europe as it has in India. As a result, power coal-fired generators remain very unsettled and their low prices, sometimes below generation costs, challenge the health of power generators said Capgemini in its European Energy Markets Observatory report.

Generators in Europe are finding it hard as in India must therefore quickly adapt their business models to these new realities and accelerate digital transformation efforts focused on productivity, agility and innovation, in order to grow profitable revenue streams, finds the report.

As highlighted at COP21 in Paris, the urgent focus for world governments is to limit the rise in the planet's temperature to 2°C by reducing greenhouse gas emissions. The European Union has set a target of a 40% reduction in Greenhouse Gases by 2030, this has subsequently given rise to large investments into renewable energies. The increase of renewables in the electricity mix has caused electricity market destabilization. It raises a number of questions on alternative ways that could have been chosen, leading to the same results, but that might have mitigated the impact on utilities.

Perry Stoneman, global head of energy & utilities sector at Capgemini, said: "The rhythm of development of renewable energy has long been dictated by regional objectives, rather than where the investment was most needed to service infrastructure and consumers. We now need to maximize advances in technology to establish competitive storage, using batteries, for example, that can optimize the use of energy that is being produced."

During the past 12 months, the costs of renewable energies have continued to fall: onshore wind costs are becoming competitive, while offshore wind costs have fallen for the first time, reaching a lower threshold of €87/MWh. Additionally, a fall in the cost of photovoltaic solar installations is continuing, with a further drop of 20% expected in the next three years.

Since 2004, Europe has shown a willingness to research, develop and deploy these technologies with investments in renewables in Europe reaching €750 billion, accounting for a quarter of the total global investment, despite making up only 7% of the global population. This demonstrates the European determination to quickly deploy, in some cases too quickly, these technologies before they are competitive.

This proactive policy has resulted in costs to purchase being significantly higher than power generation costs. The subsidies are financed by the end consumer through special taxes resulting in high retail prices. In Germany, for example, one of the most dynamic European countries, end consumer will pay €20 billion in extra taxes in 2016 with more than 25% of the bill going towards renewable energy subsidies.

According to Colette Lewiner, energy and utilities expert at Capgemini, “Additional efforts in R&D and industrialization are necessary to take advantage of the fall in renewable energy costs. Reform of the current system of subsidies is also urgent; it is expensive and not justified for energies that are maturing.”

The wholesale electricity markets remain very unsettled and their low prices challenge the health of power generators, which must accelerate their transformation to grow profitable revenue streams

The growth in renewables in a market experiencing overcapacity, combined with the low oil and gas prices, has resulted in a fall in electricity wholesale market prices, which reached a low point at the beginning of 2016 of €22 per MWh compared to €40 per MWh on average in 2015.

With priority given to renewables in order of merit, power generators, like in previous years, are closing gas or coal power stations, which operate for too little time to be profitable.

With the deregulation of the markets, a large part of generators turnover is exposed to low wholesale market prices and as such their financial situation has continued to deteriorate. Utilities are urgently seeking solutions to overcome these challenges with two major German electricity companies, splitting in two: carbon-based production on one side, and renewables, nuclear, networks, marketing and services on the other. It remains to be seen whether this solution will be a success.

According to Perry Stoneman: "It is essential that utilities adapt their business models to the fundamental changes in the markets, including decentralization of production, an increase in renewables, new requests from consumers, and the arrival of new players. They must simplify their organization and accelerate digital transformation, which will enable them to make productivity gains, grow profitable revenue streams, and become more innovative and agile."

Through energy transitions, new decentralized production and consumption models are emerging and creating challenges for network managers.

Network managers must balance production, which has become more uncertain due to the growing proportion of renewables, with consumption. In time, with closer decentralized production and consumption combined with electricity savings, the electricity networks could convey less electricity. Prior to this network operators need to invest in smart grids.

Network managers look to storage technologies to help balance demand and production on the network. One such form of storage is batteries; while they remain expensive, the price of Lithium-Ion batteries is falling and will continue to do so, therefore offering a genuine solution for storage.

Another way of achieving supply-demand balance is to make consumption more flexible, with price signals reflecting the low production costs when renewables produce a large amount of electricity.

Perry Stoneman said: "Distribution network managers have an increasingly central role in market operations. They face high activity with the connection of renewable plants, the deployment of smart meters, and the exploitation of the large volume of data coming from these meters. This data, which contains interesting information on consumer behaviors, could, under certain conditions, be made available to consumers themselves as well as industry players: distributors would then become data suppliers too."